New loans drop to lowest in 8 months in China

China’s new loans in July fell to their lowest in eight months due to property curbs that have cooled mortgage lending and seasonal effects, reinforcing views economic activity will slow in the second half.

Chinese banks extended 825.5 billion yuan (US$123.7 billion) in net new yuan loans last month — the lowest since November 2016 — down from 1.54 trillion yuan in June, but the figure was still above the 800 billion yuan expected by analysts surveyed in a Reuters poll.

Analysts say July loans indicate that banks moved some of their riskier shadow credit back onto their books in response to tighter regulations.

China is trying to reduce financial risks by containing rising debt and defusing property bubbles.

“This shows that banks are giving more support to the real economy as loans go back to the normal channel — in line with the direction of financial regulations,” said Wen Bin, senior analyst at Minsheng Bank in Beijing.

July lending is traditionally weak but last month’s level was still 49 billion yuan higher than the average of July figures between 2014 and 2016, according to Reuters calculations based on central bank data.

Broad M2 money supply in July grew 9.2 percent from a year earlier — the slowest since records began in 1996, central bank data showed, missing forecasts for an expansion of 9.4 percent and compared with June’s 9.4 percent.

The People’s Bank of China has said that the slowing M2 growth could be a “new normal” due to the stepped-up crackdown on risky shadow lending activities.

Household loans, mostly mortgages, fell to 561.6 billion yuan in July from 738.4 billion yuan in June, according to Reuters calculations based on the PBOC’s data.

Household loans accounted for 68 percent of total new loans last month, up from 48 percent in June.

Economists believe China will meet its 2017 growth target of around 6.5 percent after a surprisingly strong expansion of 6.9 percent in the first half of the year.

But most China watchers expect activity will slow slightly in coming months as signaled by a raft of data for July, mainly as higher financing costs and government measures to cool the heated property market dent economic output.

Total social financing, a broad measure of credit and liquidity in the economy, fell around a third in July to 1.22 trillion yuan from 1.78 trillion yuan in June.

Combined trust loans, entrusted loans and undiscounted banker’s acceptances, which are common forms of shadow banking activity, fell by 64.4 billion yuan in July, according to Reuters calculations.

The PBOC switched to a modest tightening stance at the start of this year to help cool a surging rise in debt, but it injected substantial funds in June to avoid a quarter-end cash crunch, market participants said.

The PBOC will strike a balance between deleveraging and maintaining stable liquidity, it said in the latest quarterly policy report that underscored policymakers’ efforts to keep the economy on an even keel.

“While we think the PBOC is now done tightening monetary policy, we expect market rates to remain elevated enough to keep credit growth slowing,” said Julian Evans-Pritchard at Capital Economics.